India is one of the most popular destinations in the retail arena around the world. Thanks to high market potential and low economic risk it is considered as a highly profitable country for the retailers.
Although India provides an ideal atmosphere for doing business, more than 90% of the retail industry is unorganized. GST regime is expected to change this but at a cost.
The following are some of the major changes that GST will bring in the Indian wholesale market:
- High Taxation
In the current taxation system, wholesalers usually buy in bulk and pay in cash. They sell the goods at extremely low profits (about 1% or so) but are still able to generate high revenues due to the scale itself.
One of the reasons why wholesalers are happy with their business in India is because most of them don’t come under the tax radar. They deal with next to no formal paperwork and use cash for transactions for the most part. However, GST will take that comfort away from them.
GST regime is a based on an interconnected system in which manufacturers, wholesalers, distributors, and retailers will need to work in sync to avoid penalties and enjoy the tax benefits it has to offer. So, wholesalers who will come under a tax bracket will have to pay their taxes, or they won’t get business at all. This is because the other entities (distributors, retailers, etc.) in the chain would want to stay compliant to claim input tax credits. Moreover, the GST council is especially determined to check tax evasion under the new taxation system to increase tax revenue.
- Stock Problems During Migration
The entire wholesale industry is based on small margins and large inventories. Thus, in an event of cash crunch, stock clearance can become a big problem. In fact, the same happened last year when the government launched the “note-ban” operation. Industry experts believe that the same can happen after GST implementation.
Wholesalers who still have stocks are supposed to pay VAT on them at the day of GST launch as per the existing laws. For their convenience, the government has made provisions that allow them to use the VAT paid as input tax credits in the GST scheme. However, they need to satisfy certain conditions to qualify, which is not possible for every business.
Another problem with the new tax regime is linked to excise duty. Wholesalers who have paid excise duty can receive 100% tax credit but only if they can furnish appropriate invoices. If that’s not the case, they will only get 40% of the excise in the form of tax credits.
- Increased Business Costs
To be GST-complaint and avail its benefits, wholesalers will need to maintain and record their transactions, furnish returns, and do a lot more. Plus, the majority of them will also need to pay higher taxes. So, doing business is going to become an expensive affair.
Since manufacturers can’t do without someone selling their products, they are likely to try helping the wholesalers through better pricing and higher commissions, etc. Distributors, on the other hand, would have already adapted to the GST regime to protect themselves, albeit at a smaller cost. Thus, the manufacturers are likely to start leaning towards direct distribution rather than through wholesale networks- a misfortune for the wholesalers.
For the most part, the life of an average wholesaler is going to be tough under the GST regime. According to industry stakeholders, they will need at least a few months to adapt to the changes and get back on track. However, they will still benefit with an organized system, in the long run, that’s for sure.